On 24 April 2020, the Financial Conduct Authority (FCA) confirmed a package of proposed temporary measures to support customers who have entered into motor finance and high cost credit (including payday loans, buy-now-pay-later (BNPL), rent-to-own (RTO) and pawnbroking) agreements. The confirmed measures came into force today, 27 April 2020. These measures complement those already announced in relation to personal loans, mortgages, credit cards and overdrafts.
Where customers are experiencing problems meeting finance or leasing payments as a result of temporary financial difficulties arising from Covid-19, the new measures require firms to:
- provide customers with a three month payment freeze;
- avoid taking steps to end an agreement or repossess a vehicle;
- avoid changing contracts in ways which are unfair to customers (for example, by taking advantage of any temporary depreciation in the price of motor vehicles during the Covid-19 crisis to recalculate the balloon payments payable at the end of the term under Personal Contract Purchase (PCP) agreements); and
- work with customers who wish to keep a vehicle at the end of the term of a PCP agreement but do not have the necessary cash to cover the balloon payment to find a solution.
High-cost short-term credit (including payday loans)
The new measures require that firms that provide high-cost short-term credit offer customers a one month interest free payment freeze where they are facing payment difficulties arising from the Covid-19 crisis. The shorter proposed period for the freeze reflects the fact that the majority of such loans have much shorter terms and is also designed to prevent firms accruing significant additional interest during the period of the freeze. The FCA expects firms to use the period of the freeze to engage with customers to establish whether they will be in a position to resume payments at the end of the freeze period. Where a customer continues to face payment difficulties at this stage, the FCA expects firms to provide forbearance in accordance with its rules.
The FCA also reminds firms that immediate formal forbearance may be more appropriate where customers were already in financial difficulty before the Covid-19 crisis or their financial difficulties are likely to persist for longer than a month.
Other credit products
Firms providing RTO, BNPL or pawnbroking agreements are required to provide three month payment freezes in the same circumstances. The new measures also state that:
- pawnbrokers should (i) extend the redemption period for the three month freeze period, or (ii) where the redemption period has ended, agree not to sell an item that has been pawned for that same period, or (iii) suspend any sales that have already been notified to customers for the same length of time;
- BNPL firms should extend the length of any ongoing promotional period by the length of the payment freeze; and
- RTO firms should provide a three month payment freeze and, where customers require the goods during the guidance period, firms should not repossess the goods.
If social distancing rules prevent pawnbrokers and RTO firms from redeeming, collecting or repossessing goods they should not pass on any additional costs incurred to customers.
Except in the case of high-cost short-term credit providers, firms will still be permitted to charge interest during any payment freeze. However, the FCA emphasises that both firms and consumers need to consider the level of interest accruing on outstanding balances and balance this against the need for immediate, temporary support. If a payment freeze is not in a customer’s best interests then firms should offer an alternative solution potentially including the waiving of interest and charges or rescheduling the term of the loan.
Where a customer is likely to be unable to resume payments at the end of the payment deferral period they should contact their lender who should then work with them to resolve these difficulties in advance of payments being missed.
The FCA also emphasises that the above measures do not prevent firms offering customers more favourable forms of assistance.
Implications for ABS and specialty finance
As with the earlier FCA guidance on mortgages, personal loans and credit cards this new guidance is likely to have a significant impact on ABS investors and specialty lenders. The same issues as are flagged in our previous note on the impact of that earlier guidance from the FCA will apply to deals backed by motor finance etc. agreements.
A copy of the final measures can be found here.
We have worked at pace to introduce temporary financial relief tailored for a range of specific credit products. Many firms are already working with their customers, but these measures ensure all consumers affected by the coronavirus emergency can apply for a temporary freeze on their payments.